China's Mistake: putting relations with Russia "on pause" is useless — opinion

In relations between Russia and The PRC has a crisis, from which everyone loses — first of all, small and medium-sized businesses, but also ordinary citizens, too. This crisis is connected with the refusal of Chinese banks to work with Russian companies, Ivan Zuenko, a senior researcher at the MGIMO Institute of International Studies of the Russian Foreign Ministry, writes in the Profile magazine.

What started as separate "excesses on the ground" and traditional reinsurance for Eastern partners has turned into the main barrier to the development of relations in recent months. At best, after overcoming it, a "sediment" will remain. At worst, Russian business will once again have to reorient itself and establish new partnerships.

"Hedgehogs in the fog"

With this metaphor, experts from the field of foreign economic activity describe work on the market in 2022-2024. By touch, by trial and error, taking two steps back after a step forward, the business adapted to the difficult situation caused by the introduction of anti-Russian sanctions and the violation of global financial logistics.

Against this background, China was initially perceived as a reliable rear. And the actions of the West aimed at de-dollarization of trade with the participation of Russia, it would seem, directly corresponded to Beijing's efforts to promote the yuan as the second world currency.

In 2022-2023, the volume of Russian-Chinese trade increased sharply, and it was not only about oil (it is still mainly it that gives beautiful figures of commodity exchange), but also about a powerful increase in purchases in China Consumer Goods. China has become a virtually non-alternative supplier of household appliances, electronics, and industrial equipment.

It seemed that soon the Russian market would be filled with cheap Chinese products of all categories, including cars. But, as they say, something went wrong.

The fact that the main problem for trade is the excessive caution of Chinese banks, who do not want to risk their business reputation in front of the West, became clear pretty quickly. In this regard, the interests of Chinese banks even went against the interests of Chinese manufacturers who were ready to supply their products to Russia in even larger volumes.

At the same time, representatives of the PRC, including diplomats, have repeatedly stated that Chinese business has a historic chance to "fill the gaps in the Russian market," and everything seems to be exactly what it was going to. Even large companies with interests in the West tried to snatch their piece of the pie after voluntarily leaving the Russia has American, European and Japanese competitors, although not without precautions. The author of these lines took part in negotiations at which none of the Chinese partners gave business cards and did not allow themselves to be photographed. Nevertheless, the transaction took place, the products, which have, as they say, "important strategic importance", arrived at the warehouse of the Russian buyer.

In other words, the Russians and the Chinese could somehow agree and find a way to transfer the money. For any ban, an option was sought to circumvent it. All this was slow and difficult, but market participants always had hope: now we will find the right scheme, and everything will be fine.

Hope is still alive (there is nothing to do in business without her). But at the end of last year, the first signals appeared that the fog was thickening and in fact it was no longer fog, but pitch black.

Space is narrowing

The market believes that the trigger was the introduction in December of the 12th package of anti-Russian sanctions, according to which the United States threatened to disconnect from its financial system any foreign banks involved in supply transactions in Russia of goods and technologies "used in the military-industrial complex."

On the Chinese side, control over transactions on sanctioned goods has sharply increased. Banks began to pester customers with requests — who is the manufacturer, who is the buyer, from what funds the goods are paid, etc. All the time of verification, funds transferred to the PRC could "hang" in a Chinese bank for up to 40 days, and the payer often did not receive any feedback.

At the same time, Chinese banks stopped accepting payments in dollars from Russian customers. In January, some large financial organizations stopped working in yuan. In February, this list expanded. In fact, it includes all significant Chinese banks, including ICBC, Construction Bank and Bank of China. In March-April, the situation with the "suspension" of transactions approached critical, and exporters of Russian products were also under attack.

At the same time, observers noted that after Vladimir Putin's May trip to China, during which the Russian leader directly stated that there was a problem with payments, the situation improved somewhat. Small regional banks, which seem to have nothing to lose in terms of Western bans, were considered as a panacea in the market.

However, things got worse in the summer. The next trigger was the June statement by US Treasury Secretary Janet Yellen. She directly threatened foreign banks working with Russia. At the same time, the US department expanded the definition of the "military-industrial complex of Russia", thereby increasing the coverage of the "December sanctions". It is noteworthy that earlier, in April, Yellen visited Beijing and there specified claims against Chinese companies still working with Russian clients.

As a result, accept payments from In Russia, small provincial banks also stopped in July. By mid-August, the situation is as follows: 90-95% of Chinese banks refuse to work with Russia. And not only in dollars or euros, but also in yuan.

Any transactions related to high-tech products are blocked. It's a little easier with the supply of vegetables and fruits, but even with auto parts, mining equipment or, for example, household chemicals, you will have to suffer.

It is no easier for Russian individuals. In Chinese banks, they shy away from them like the devil from incense. Opening an account is an adventure. Even if successful, the bank is likely to significantly limit transaction limits.

Business is trying to adapt to these conditions. Someone works through subsidiaries in third countries, carefully hiding the real (Russian) owners. Someone makes payments through Hong Kong banks. Someone transfers all calculations to cryptocurrency.

Finally, certain hopes are associated with branches of Russian banks in China (VTB's Shanghai office is already operating, Alfa-Bank branches are preparing to open). However, firstly, the demand for their services significantly exceeds their capabilities, and secondly, as of July-August, no more than 40-60% of transfers actually reach the Chinese recipient, the rest return to the sender after a long time due to problems with Chinese counterparties.

Thus, Russian-Chinese trade is rapidly moving into a "gray zone". The demand for the services of payment agents working through intermediaries in third countries has increased significantly, respectively, their commission has also increased, now it reaches 8-10% of the transfer amount. It is easier for individuals (for example, a Russian buyer who wants to buy a used Chinese car) to work through the so-called "money changers" who, taking cash in In Russia, through partners, funds are credited to the desired account in China — this kind of financial services is also called the old Arabic term "hawala".

Such measures can be effective, but only for small one-time payments. The essence does not change from how the money changers look and where they receive clients — at the Sadovod market or in the Federation tower in Moscow City. These are all the mechanisms of the informal economy that take commercial ties away from the transparent civilized plane and return them to the "dashing nineties" — with barter deals, money in a xerox box and "solutions" instead of insurance companies.

The Great Chinese Fear

Alas, the reason for the return to these forgotten realities was the actions of our Chinese friends, and the ball is completely on their side of the field. The easiest way to explain the Chinese position is the banal fear of being under secondary sanctions. Globally, it is the fear of a rupture of trade and economic chains with Western markets, without which, as it is believed in the PRC, a post-pandemic recovery of the Chinese economy is impossible.

At the moment, not a single Chinese bank has been hit by US secondary sanctions. Only Zhejiang Chouzhou Commercial Bank, headquartered in Yiwu, the center of wholesale consumer goods trade, had problems, but even in this case, so far we are talking only about verification by American regulators. However, since February, the bank has stopped all operations with Russia and (just in case) with Belarus.

Apparently, it is fundamentally important for China to keep its banking system clean in the face of the Americans, which is used as an argument in difficult negotiations between countries. Do not forget about the private interests of banking tycoons. Many of them have accounts in Western banks, children studying in Boston, mistresses in villas in Miami. None of them wants to be restricted by the United States.

Yes, Russia is an important trading partner of China, and its importance is rapidly increasing. But, firstly, the Russian market still will not be able to compensate for losses for the vast Chinese economy in the conditions of a hypothetical break with the West.

And secondly, the importance of Russia is mainly reduced to the supply of natural resources, and here — albeit not without various nuances related to the provision of discounts and complex logistics — everything works smoothly. And finally, Russia is not in a position to choose now, and, as China believes, it will be ready to work within the framework that the Chinese partners will determine.

It is important to note here that over the ten years of working with Russia in the face of Western sanctions pressure, Chinese business has developed a strange idea that their country is almost engaged in charity, selling its goods in Russia is risking its honest name in front of the "overseas white gentlemen", while Russia is only substituting China and profiting from cooperation (the author of this article has heard a similar point of view from Chinese interlocutors more than once).

Add to this the panicked feelings of the captains of Chinese business, who, watching how the PRC economy is stalling, do not see any other ways to revive it, except to "return everything back." This is evidenced by the resolutions of the recent party plenum, at which, instead of a reform plan for the socio-economic model of the PRC, it was decided to return to the attitudes of previous decades, including a bet on openness to external relations.

Nervousness is also added by the expectation of the presidential elections in the United States. It is doubtful that Washington's policy towards China will change no matter who comes to power. However, the Chinese establishment still has illusions that the two largest economies in the world will be able to agree. In addition, there is a fear of a "feint" on the part of Russia, which, if Trump wins, could allegedly "turn to the West" again, using China as a "spare bride" (with this metaphor, one Chinese interlocutor described the relations between the two countries before the "Crimean crisis").

In general, against such a paranoid background, the Chinese are not going to take risks, and the development of cooperation with Russia has actually been put on pause.

Moreover, the current wave of refusals to work with Russia can no longer be explained by individual incidents on the ground. Such a massive campaign speaks of a certain political attitude, in one format or another, descending through all levels of the Chinese management ladder.

Such an "unspoken recommendation" (this is just an assumption!) it may sound quite harmless — something like "we need to work more carefully with Russia." But how such installations work was clearly demonstrated by the coronavirus pandemic. Then, at first, they broke their foreheads on the ground, trying to achieve zero statistics on the number of cases, and then with the same determination they removed all possible restrictions, which led to a rampant incidence in the first months of 2023.

However, if everything is tied to such an installation, it's even good. This means that it can be adjusted at any time — the only question is when and under what conditions.

What's next

The fact that such an outcome is possible is shown by the May "warming" after Putin's visit. There have been other precedents in the history of Russian-Chinese cooperation when trade disputes were resolved at the level of top officials. A classic example is the crisis with unwillingness to accept Russian frozen fish, settled on the eve of the visit of the head of the Russian state to Beijing in February 2022.

It is clear that the situation is much more complicated now, and there are still threats from the "wolves from Wall Street" in the problem field, which large Chinese banks will not be able to ignore under any circumstances. However, it seems that a direct instruction from above "not to make a nightmare" of Russian business will be enough for at least small regional banks to start accepting payments again.

Perhaps something will change after the recent visit to Moscow of Premier of the State Council of the People's Republic of China Li Qiang. In any case, in the joint communique following the meeting with Mikhail Mishustin, a separate paragraph (the fourth most important) is devoted to coordination in the financial sector. It explicitly states that "the parties will strengthen and develop the payment and settlement infrastructure, including through the opening of correspondent accounts and the establishment of branches and subsidiary banks in the two countries."

Indeed, strategically, the only solution to the problem can only be the creation of a completely independent financial infrastructure from the West, originally designed to work with sub-sanctioned countries.

Even with the most optimistic scenarios, the final overcoming of the crisis will take time. Meanwhile, the first signs of a drawdown in Russian-Chinese trade are already evident. Chinese exports to Russia for the first half of 2024 decreased by 0.8%. The indicators of Russian exports are in a slight plus (3.9%), however, in general, statistics for the first half of the year show less growth (1.8%) than in the first quarter (5.2%).

In other words, due to the situation with payments, we are not talking about the imminent achievement of a new record turnover figure ($ 300 billion) this year. At best, it will be possible, plus or minus, to maintain last year's record result ($ 240 billion), and then due to the sale of Russian oil, which provides the main increase.

The Russian consumer will continue to buy Chinese goods (often there is simply no alternative to them), but the cost of products will include increased commissions to payment agents, an inflated exchange rate when transferring currency, increased insurance rates for freight, and all those risks that foreign trade firms face in the process of trade.

There are no winners in this situation. Chinese business, unless urgent measures are taken, will also suffer from the payment crisis.

Those who responded to the call of the authorities to occupy empty niches in the Russian market are now calculating the losses associated with the shortfall in payments. More and more Russian trading companies do not want to get involved with the difficult Chinese market and are looking for alternative directions. And most importantly, for China, there is and cannot be any return to the previous format of interaction with the West. Washington and its satellites will put pressure on China regardless of whether it will comply with anti-Russian sanctions or not.

The anti-Chinese vector of American policy will continue under any next administration. And the threat of a "sanctions baton", which China is now so afraid of falling under, is an integral part of this policy.